[lbo-talk] Geithner clarifies

SA s11131978 at gmail.com
Mon Mar 23 20:28:06 PDT 2009


Michael Pollak wrote:


> and I was kind of stunned at the details. To start with Sweden only
> nationalized 1 -- count 'em 1 -- bank. There was another it already
> owned (which turned out to be the worst of the bunch, oddly). But the
> remaining 3 banks remained entirely private. And the first step
> Sweden did -- and everyone agrees this was absolutely key -- was
> *guarantee all the liabilities for all Swedish banks -- including all
> the ones in private hands.* And on this basis, the private banks could
> then raise private capital, all of which was pre-guaranteed by the state.
>
> If someone proposed this in America today, it would be called the
> mother of all no-strings bailouts, hand-outs and moral hazards. I
> certainly can't imagine anyone on the left thinking they want to do
> that here.

But we've *already* guaranteed all bank liabilities. We raised the deposit insurance limit, gave a blanket guarantee to money market funds (where much bank commercial paper was concentrated), effectively guaranteed Bear Stearns' liabilities through a series of non-recourse loans, and explicit signals have been broadcast that the US won't let any bank default on its debts. That's why inter-bank lending rates are almost back at pre-crisis levels: everyone knows that however bad things get, the government is backstopping bank liabilities, even if there wasn't a big press release announcing it.

But that's a no-brainer. The point of guaranteeing bank liabilities is just to forestall a liquidity crisis (a run on the banks, in whatever form). Once that's been done, you still have to deal with the solvency issue. If a bank is insolvent it has to be nationalized. It's not just Sweden that does this. When your little local bank goes insolvent, it's nationalized. That's the normal, standard solution. Granted, it's more complicated when you're dealing with giant mega-banks, but that's why it's called a "crisis."

I don't follow your thinking here. Is there some big point you think Simon Johnson, Krugman, Roubini, Stiglitz, etc., have all failed to see?

SA



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